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FAI Publications, Scottish Economy

New restrictions likely to hinder optimism for a strong recovery in the new year

The central outlook is still for the Scottish economy to meet pre-pandemic levels in the Spring, but Omicron casts a shadow over the speed of recovery in 2022 as restrictions are increased

Despite the threat of the Omicron variant, and the introduction of new economic restrictions, the Scottish economy is still forecast to recover to pre-pandemic levels in the Spring of 2022.

This is according to the latest quarterly Economic Commentary from the Fraser of Allander Institute at the University of Strathclyde.

In the Deloitte sponsored Economic Commentary, the Institute predicts growth of 6.4% in 2021 and 4.7% in 2022. The economy is now expected to get back to pre-pandemic levels in May 2022: one month later than predicted in September due to growth in the Autumn underperforming the previous forecast. However, the impact that the latest restrictions may have on the economy, particularly on the retail and hospitality sectors, will take some time to emerge.

The latest Commentary also looks at the progress the country has made in 2021.

Director of the Institute, Mairi Spowage, said: “The economy is in a better place than feared a year ago, underpinned by the delivery of the vaccination programme and the advancements made in understanding and treating the virus.

“As we moved through the first half of 2021, the prospects for growth in the economy continually improved. Despite growth faltering in the Autumn due to rising prices and supply chain constraints, expectations are much better for the outlook in 2022 and beyond, compared to what was feared  earlier in the pandemic.”

This quarter’s Commentary also finds the removal of the furlough scheme, has not had the negative impact on employment and unemployment that was feared.

However, there are initial signs that Scotland may be recovering more slowly than the UK as a whole, with both output and earnings data lagging the UK.

Mairi Spowage, continued: “Despite the threat of the new Omicron variant, we have chosen to keep our forecasts broadly similar to those we produced in the Autumn.

“This sees growth getting back to pre-pandemic levels in Scotland in May 2022, a little later than previously forecast, due to sluggish growth in the Autumn.

“But of course, these forecasts are very uncertain right now. The announcements made earlier this week, however necessary they may be for public health reasons, are likely to put a constraint on some business’s ability to make the most of the important Christmas period.

Steve Williams, Senior Partner at Deloitte in Scotland, said: “Over just a few days there have been many anecdotal examples of the new variant’s impact on economic activity, with businesses in retail, travel and hospitality particularly affected. During what is traditionally a very busy and important time of year for these sectors, there are reports of footfall decreasing and bookings being lost.

“However, after the past 18 months, businesses are accustomed to adapting to restrictions, so measures to check the spread of the virus will likely have less effect on activity than in 2020. Nevertheless, these latest developments are expected to have a short-term impact on growth.

“For businesses, while much is uncertain, leaders can still prepare for 2022 by prioritising broader challenges such as inclusive growth and social mobility in a way that creates opportunities, and weaves them into a long-term strategic vision. Addressing challenges such as these will be critical to any post-pandemic recovery, while climate change and sustainability will rightly remain a priority on corporate agendas for some time.”

This economic context provided the backdrop to the Scottish Budget last week. The first Budget of this new session of parliament, and Kate Forbes’ third Budget, saw some big choices made.

The health budget will increase by a huge £1.8bn to deal with the pandemic’s legacy on the health service, longer-term demographic change, and other commitments to address specific issues on drugs deaths and mental health.

The first stage of reforms to social care, following on from the Feeley review, could be seen in additional resources (£170m) for local government to pay a higher wage floor to social care workers, an additional £200m to support health and social care integration, and £124m to begin the expansion of social care access.

Local authorities will also receive an additional £145m to behind the process of recruiting 4,000 additional teachers and support staff this parliament.

The government’s flagship policy – not only for this year but also for the parliament as a whole – is clearly the Scottish Child Payment. This is genuinely a bold and distinctive policy. The doubling of the payment from the originally planned £10 per week to £20 per week means that it will make a substantial contribution to the government’s ‘mission’ to tackle child poverty.

David Eiser, Head of Fiscal Analysis at the Institute, said: “Kate Forbes billed her first budget of the parliament as a ‘transitionary’ budget of ‘choices’.

“In a nutshell, these choices were to prioritise investments in health, social care and social security and to risk the ire of local government with cuts to its core budget (offset by faster increases in additional resources for new commitments). Much of this had been expected in advance.

“But the budget did contain two surprises – one on tax policy and one on tax forecasts.

“The big policy surprise was the decision to roll back non-domestic rates reliefs for retail, hospitality and leisure businesses more rapidly than many had anticipated.

“The other surprise was in relation to income tax forecasts. Since its last forecasts in August, the SFC has wiped £400m off its income tax forecast for 2022/23 – not good news for the Scottish budget.”

You can read the full commentary here.

Authors

Mairi is the Director of the Fraser of Allander Institute. Previously, she was the Deputy Chief Executive of the Scottish Fiscal Commission and the Head of National Accounts at the Scottish Government and has over a decade of experience working in different areas of statistics and analysis.

Adam is an economist at the FAI who works closely with FAI partners and specialises in business analysis. Adam's research typically involves an assessment of business strategies and policies on economic, societal and environmental impacts. Adam also leads the FAI's quarterly Scottish Business Monitor.

Find out more about Adam.

Calum is part of the Knowledge Exchange Team at the Fraser of Allander Institute. Recently, he completed an MSc in Economics from the University of Edinburgh, having previously achieved a first-class honour’s degree in Economics and Finance from the University of Strathclyde.

David is Senior Knowledge Exchange Fellow at the Fraser of Allander Institute

 

 

Ross Mcalinden

Ross is an MSc. Applied Economics student at the University of Strathclyde and is currently doing his work placement with the Fraser of Allander Institute.